Buying a car, new or used, is a financial commitment. You can make a down payment, reducing the amount you’ll have to pay monthly on the vehicle. But what if you have more pressing debt, like a credit card or student loan debt? Does it make sense to sign up for a car payment plan and use the short-term cash to pay other debts first? We’ve analyzed the pros and cons of each choice.

Why make a down payment on a car?

Tips While Financing a Car to Save Money

Let’s be honest, few of us can pay the full price of a vehicle out of pocket. If you make a down payment, you’ll still finance or borrow the remainder of the cost. But the payment reduces your loan-to-value ratio—the amount of your loan divided by the cash value of the vehicle. A lower loan-to-value ratio often leads to better loan deals. You might get a shorter loan term, a better interest rate, or reduced monthly payments.

You’re less likely to go underwater. Car loan holders are considered “underwater” or “upside down” on a loan when they owe more money than the car is worth. This is also called, in less scary-sounding terms, having negative equity.

How can negative equity affect you? If the car’s stolen or totaled, or if you need to sell, you’re still on the hook for monthly loan payments. And the lower worth of the car means your insurance won’t pay enough to cover the cost. So you’re paying full price for a car you no longer have.

How much of a down payment should I make?

The rule of thumb is to put down 20 percent of the value of the car. This amount is large enough to keep you from going underwater, but not large enough to make the car unaffordable. To calculate how much a 20 percent down payment will be, use our car affordability calculator to figure out what you should spend overall.

Good credit might get you a great loan deal. With stellar credit, you can often get low-interest rates and a short loan term without making much of a down payment at all. Dealers like to offer incentives, especially for new cars, and might even give you an 0 percent Annual Percentage Rate (APR) for the loan. With a deal like that, you can save the down payment cash for other debt.

Spread the love